Forex Trading Fundamental Analysis 2

Question 1

What is 'quantitative easing' (QE) and what is its typical effect on a currency?

Accepted Answer

Central bank purchasing assets to inject money into the economy, which typically weakens the currency

Answer

QE involves a central bank creating new money to buy financial assets, expanding the money supply and typically weakening the currency by increasing its availability.

Question 2

A central bank described as 'hawkish' is signaling which monetary policy tendency?

Accepted Answer

Bias toward tighter monetary policy and higher interest rates to combat inflation

Answer

A hawkish stance indicates a central bank is concerned about inflation and leans toward raising interest rates or tightening policy, which typically strengthens the currency.

Question 3

What is 'forward guidance' as used by central banks in communication with forex markets?

Accepted Answer

Communication by a central bank about its likely future monetary policy intentions

Answer

Forward guidance is when a central bank signals its probable future policy direction, helping markets price in expected rate changes and reducing sudden forex volatility.

Question 4

Which institution sets the federal funds rate, the primary interest rate benchmark influencing the US dollar?

Accepted Answer

Federal Reserve (the Fed)

Answer

The Federal Reserve sets the federal funds rate through its FOMC meetings, making Fed decisions the most influential policy events for USD currency pairs.

Question 5

What typically happens to a currency when its central bank adopts a 'dovish' policy stance?

Accepted Answer

The currency weakens due to expectations of lower interest rates

Answer

A dovish stance signals potential rate cuts or looser monetary policy, reducing the appeal of holding that currency and typically causing it to depreciate.

Forex Trading Practice Test

Forex Trading Practice Test

Forex Trading Fundamental Analysis 2